I am a senior editor at Forbes, covering legal affairs, corporate finance, macroeconomics and the occasional sailing story. I was the Southwest Bureau manager for Forbes in Houston from 1999 to 2003, when I returned home to Connecticut for a Knight fellowship at Yale Law School. Before that I worked for Bloomberg Business News in Houston and the late, great Dallas Times Herald and Houston Post. While I am a Chartered Financial Analyst and have a year of law school under my belt, most of what I know about financial journalism, I learned in Texas.

Iran's Real Weapon Of Mass Destruction Is Oil Prices

Oil prices jumped 8% last week after Iranian Vice-President Mohamad Reza Rahimi threatened to close the Strait of Hormuz if the rest of the world slapped an embargo on his country’s oil exports. Today, Reuters reports the European Union will do just that, with its diplomats agreeing in principle to halt Iranian imports.

There are lots of practical reasons to suspect Iran is bluffing. Not only would attacking shipping in the Strait be military suicide, but the regime needs the hard currency it gets from exporting 2.1 million barrels a day. Still, Iran is playing a powerful hand when it threatens to disrupt shipping through the narrow Strait and choke off what the Energy Information Administration estimates is 20% of the world’s traded crude.

As my friend and economist Ed Hirs pointed out in a paper in 2010, the loss of 10 million barrels a day of Middle East production could drive short-run oil prices to $413 a barrel, given the inability of consumers to rapidly shift to other fuels. And that kind of shock is enough to blast the U.S. economy back into recession. Economist Kevin Kliesen with the Federal Reserve Bank of St. Louis said that sudden and sustained increases in oil prices increase the odds of recession by 50% in the first year, and 90% after three years.

“If you look at the historical data, nine of the past 10 recessions in the U.S. were preceded by sharp increases in oil prices,” Kliesen said. “If it’s large enough, it can cause people to adjust their future path of spending.”

A 50-cent increase in gasoline prices sucks $70 billion a year out of the pockets of U.S. consumers. And none less than Federal Reserve Chairman Ben Bernanke, earlier in his career, wrote that unexpected new information like jumping oil prices can cause businesses to delay capital spending, since the “option value” of waiting to see what happens next exceeds the expected return on investment.

Economists re-examining the 2008 financial meltdown are increasingly identifying the sudden, 55% jump in oil prices that preceded it as a big contributor to the subsequent decline in economic activity. Economist James D. Hamilton of the University of California at San Diego, for example, found that a model of the impact of oil prices on gross domestic product he created in 2003 predicted, with an error of less than 0.2%, the actual decline in GDP in the third quarter of 2008.

The surprising thing, Hamilton told Congress in 2009, is that oil caused so much economic damage given other problems at the time. Plunging residential investment only accounted for about half the shrinkage in GDP in the first three quarters of 2008, for example, and some of that might have been due to consumers resisting buying homes in far-flung suburbs because they were worried about the rising cost of commuting.

“Something else, in addition to the pre-existing problems in the housing sector, contributed to tipping the scales from an economic slowdown into a self-feeding dynamic of falling output and employment,” Hamilton told Congress. “I see little basis for doubting that a key aspect of that new drag on the economy resulted from the effects of the oil price shock.”

Kliesen of the St. Louis Fed also believes high oil prices had a lot more to do with the recent recession than many people think.

“It was a key event that really helped slow things down,” Kliesen told me. “Clearly we had some different shocks in that period that really hammered the economy but oil was one of those shocks that was lost in all the reporting about the financial crisis and housing downturn.”

Sudden changes in oil prices hit the capital-goods market particularly hard, Kliesen has found, since businesses simply stop investing until they get a better sense of where prices are going (that was Bernanke’s thesis, in a more general way). Higher oil prices also drive investors to shift money toward sectors of the economy that are less affected “and such reallocation is costly,” Kliesen has written.

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michaelsondergard: With all due respect, this is exactly the view that the western corporate propaganda machine would like you to have. Unfortunately, given your case, it is very successful in brainwashing you to the point that your views, when dissecting them, have no evidential basis. But isn’t it the nature of the brainwashing process? To form views despite the facts. By the way, there are at least two other countries, which are very active in the region, and while Iran is believed to strive at getting nuclear weapons, they both already have them. They both have history of attacking other, usually helpless countries and peoples, unlike Iran, which has never invaded another country since their ancient king Darius. Now try to concentrate and please guess which countries I am writing about.

that is right, Palestinians have a regular army, air force… that matches the Israelis, that is why you could not characterize them as helpless. Why do we care thar Israel has a nuclear weapons? Why do you think we sbould not? If Americans want to play a global cop, they shoud not be biased. However, These are questians that can be discussed with openmindedness, which is so rare commodity in US.

I’d like to respect everyone, however, your comment is so nerrowminded that discussing it would be equivalent to discuss microbiology with infants. there is a need to level the field, share certain moral norms first. we are missing all these.

Western sanctions against Iran have worked very well – for China. As shown in this article, western countries have been forced to step back from infrastructure investment in Iran’s oil and gas industry and have been replaced by China:

http://viableopposition.blogspot.com/2011/12/iran-oil-giant.html

China’s multi-billion dollar investment in Iran will definitely complicate the delicate balancing act for the United States should they choose to take military action against the Iranian regime.

I think one has to really question the feasibility of Iran shutting down the Strait or oil trade in any meaningful way.

The US and other western (and regional) navies can easily counter strike any missile bases and have anti missile capabilities. Protection of oil export facilities is also easily done.

Iran’s biggest threat is taking their oil off the market. Of course they do risk domestic harmony, but this is a nation that survived a nearly 10 year war with Iraq. They haven’t collapsed yet.

The only parties who benefit from sanctions against Iran are the Chinese and others who are still willing to trade with them… throw India, Turkey and many EU countries. This is all window dressing for Obama’s reelection campaign. Just like the Keystone pipeline decision delay.

I think you overestimate the scale and power of the missile defense system in the gulf. and US fleet.

with a little research i found that the distance between iran and the coast of the rest of the oil producers, meaning all the ports/harbors in the gulf. is on average 200 km from iran. with a maximum distance of 340 km. (google earth ruler)

when i read up on the missile capabilities of iran, it said that iran has a couple of thousands of missile. most of them in the range 150 km and smaller. but a big number of missiles has the range of 250 – 400 km. meaning that all the gulf is a potential target.

then they have medium range ballistic missiles with a range about 2100km again with google earth you can se that the entire country of saudi arabia is within that distance, meaning all the refineries and production facilities is in range and a potential target.

So if iran decided to go all out. they could destroy and disrupt the gulf, and a big number of refineries in saudi arabia.

This will be an even bigger impact on the oil prices then the article stated.

with so many missiles at there disposal it is highly unlikely that the USA or any missile defense system can stop all .

So a massive cost to the economic system will happen if a war started.

So to all those that seems to want war with iran. the cost and risk are hugh. oil prices will go up massively. iran can potently disrupt a big % of the oil supply. And then when we win, the Iranian oil production facilities is probably part payed for by china. so we can probably not take that. (china has bigger pockets also) not to mention all the lives lost.

And then i also wonder why do a large part of the people in the west think that iran is suicidal , they know that it will lose a war with USA, and if it gets and uses nuclear weapons it will be destroyed .

The most likely event that will happen if they get nuclear missile is that USA cant bully them around. israel will probably announce that they have nukes, and then it will be a stale mate. And a big blockade and sanctions against iran will ensue.

I agree with you in part on our thoughts about Iran’s state of mind and presumed irrational death (or martyrdom) wish.

I don’t see it.

Yes, they may have a lot of missiles with the state ranges, but how accurate are they? The performance of the missiles the provided to Hezbollah was a joke. Kind of like launch a hundred missiles and maybe one might hit something.

Yes, anti-missile capabilities may not that robust, but you only have to hit the ones that get close.

Counterstrike capability is the real issue. Hopefully we are far better at tracking launchers than we were 20 years ago with Saddam’s SCUDS. It wasn’t a problem 10 years ago (but maybe he had no missiles). I would think we can spot any launch sites and wipe them out before they can launch another round.

I also think that the ability to repair damage is much better than you think. One Pet Chem expert made the comment that the reason the US infrastructure is vulnerable to terrorist attack disruption is that we turn it into a crime scene and have to go through permit processes to rebuild. In the good old days you’d send in a construction crew with bailing wire and bubble gum and get it running again.

Militarily, in this day of cruise missiles and other long range weapons, and/or terrorist or disguised weaponry(such as cyber warfare), it would be virtually impossible to guarantee the flow of oil through the Straights of Hormuz. A few well placed missile strikes in the shipping lanes, or harbor facilities and you could end shipping altogether, possibly for months.

I think it is almost a certainty—if full scale hostility breaks out—especially in light of the announcements by Iranian military top brass this week, the flow of most Middle East oil will stop.

The best defense that we could possibly have? Don’t use oil.

DoD is already working that—I hope they are not too far behind the curve that they can’t catch up to the reality and immediacy of the situation.

The rest of us should have been doing the same. It seems to me though, the best we can do is be ready for the price of oil to skyrocket again. And possibly to levels that will make the 2008 price peak look tame.

We should have been making other plans and busting butt to get them launched.

[The US and other western (and regional) navies can easily counter strike any missile bases and have anti missile capabilities. Protection of oil export facilities is also easily done.]

The Straits of Hormuz at the choke point is 21 miles wide. Half of this is Iranian territorial waters to do as she likes. What is so hard to mine this stretch to prevent non Iranian shipping from using it? International shipping can use the other half. 14 super tankers a day passing through will not stop oil shipments but, together with insurance war premium, will obstruct it enough to raise oil prices

I am beginning to weary of the propaganda issued by by the USA, its puppet regimes in France , GB and Canada. The reality is that Iran has every right to develop nuclear power. The USA have lost any morility to judge any nation given their history of torture, murder, and brutality against USA citizens let alone the war crimes they have committed against other nations …. start by googling MKULTRA to see what a disgraceful nation USA has become.

Ideally we need to identify a price curve to show the point economic growth is constrained to the point of vanishing but we are confronted with a paucity of data. We believe that $147/b in mid-2008 helped trigger the ‘Great Recession’ but the global economy was weakening from late 2007. We know that the run up in prices to around $120/b in 2Q 2011 brought growth to a near halt in a number of western economies and notably in Europe. But in this case, the economies had not really recovered from the ‘Great Recession’. Douglas-Westwood analysis also shows that in mature economies, such as the US, there is a significant economic impact at over $90/barrel. In contrast China can probably sustain oil prices in the $100-110 range.

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Part of peak oil is the lack of easy resources. There is some price of oil point the United States economy cannot tolerate.

Even the threat of Iran brings economic pain to the world by the price of oil going up.

The Iranian regiment do not hide they pursue to have atomic power. Since the Iranian regimen do not hide his hostility toward America and Israel Since the Iranian regime keeps telling the world that they will soon have a sort of “secret” weapon that will be used to obliterate Israel. Since, while vociferously challenging the USA toward war and constantly menacing to block the oil supply to the west, I would say they are not our friends Since they declared to be our enemy. I do not believe they need such atomic energy for their toasters. Why to continue buying oil from somebody who keeps menacing destruction upon their own customers? Maybe they do not want to have the AB, maybe they just need atomic energy for they toasters, maybe the AB is propaganda from the Oil multinationals (that needs to be proven too), but what if after all they will have the AB, if they are so belligerent now without the AB, what will be their attitude once they have it? Can the west afford to allow the point of no return, and wake up to a new reality once they do have the AB. Why to by oil from Iran and Venezuela or any other nation with antagonist regimes that consider us to be their enemies and hate us but love our Dollars/Euros? After all if they consider us to be our enemies then they have the prerogative to stop selling us their oil whenever they want, what is the difference between that and us deciding to stop buying their oil?

[And then i also wonder why do a large part of the people in the west think that iran is suicidal , they know that it will lose a war with USA, and if it gets and uses nuclear weapons it will be destroyed .]

Exactly. Its suicide to attack the US or any other country with a nuke. But there is nothing to prevent a country from letting off a nuke device within its own territory. Try invading Iran with a highly mechanized conventional military and boom, Iran sets off a nuke device right in the middle of invaders. That will make nonsense of any strategy to regime change using conventional large armies. That, sirs, is the whole idea. Bombing attacks by planes any country can survive and fight on to wear you out. You cannot win without boots on the ground.